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The company AT&T’s current stock price is $33.79, and yesterday it paid a dividend of $1.85...

The company AT&T’s current stock price is $33.79, and yesterday it paid a dividend of $1.85 per share. Analysts expect the dividend to grow at an 8% rate for the next three years (i.e. the next three dividends) due to the continued market growth of smartphones and increased usage of data services. Beginning with the dividend in year 4, analysts expect AT&T’s dividend growth rate to level off to 3% in perpetuity as these two revenue streams mature and data prices come down. Assume a 15% discount rate for the below questions. What is the expected dividend two years from today? The answer is 2.16

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  1. What is the expected dividend four years from today? Round to two decimal places.

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Answer #1

Current stock price Dividend (D0) Next three year growth rate (g) $33.79 $1.85 4 Growth rate from 4th year onwards 3% 15% Discount rate Dividend (D n) - Dividend (D n-1) * (1Growth rate) Year Growth rate Dividend Amount Dividend 0 Dividend 1 Dividend2 Dividend 3 Dividend 4 0 1 2 $1.85 $2.00 $2.16 $2.33 10 3 $2.40 12 13 14 4 The Dividend in year 4 is $2.40

Excel formulas:

Current stock price Dividend (DO) Next three year growth rate (g) Growth rate from 4th year onwards Discount rate 33.79 1.85 0.08 0.03 0.15 4 6 Dividend (D n) - Dividend (Dn-1) * (1Growth rate) Year Growth rate Dividend Amount Dividend 0 Dividend 1 Dividend 2 Dividend 3 Dividend 4 B2 D8 (1+C9) D9 (1+C10) D10 (1+C11) D11 (1+C12) 0 SB$3 10 -$B$3 12 13 14 4 The Dividend in year 4 is -D12

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